Refund opportunities relating to research credit

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May have already filed research credit claims for portions of calendar 2013, but not calendar 2014

Have filed returns taking 50% bonus depreciation on qualifying property placed in service in 2013 but not on property placed in service in 2014

Background

President Obama on December 19, 2104, signed the Tax Increase Prevention Act of 2014 (P.L. 113-295, referred to below as the “2014 Act”) into law.

The 2014 Act provides a one-year retroactive extension of the research credit under Code section 41, applicable to amounts paid or incurred during 2014.

The 2014 Act made no other changes to the credit computation rules.The 2014 Act also includes a one-year extension of 50% bonus depreciation through 2014 for qualified property placed in service before January 1, 2015 (January 1, 2016, for certain property with a long production period and certain aircraft).

Research credit refund opportunities for fiscal year taxpayers

Fiscal year taxpayers that have already filed a tax return for a period that includes a portion of 2014—for example, for a fiscal year ended March 31, 2014, taxpayers that reported a credit based upon qualified research expenses (QREs) paid or incurred during the period from April 1, 2013, through December 31, 2013—will be able to:

Amend the return to report the full amount of the research credit to which they are entitled for expenditures incurred after December 31, 2013, and before January 1, 2015, and

Claim a refund (or other adjustment to tax) for the benefit of the increased credit amount that did not exist when the original return was filed

A taxpayer that reports a research credit on a fiscal year return—when the benefit of the credit is only to create a carryforward of the credit that can be used to reduce tax liability in a later tax year—generally does not need to file an amended return for the fiscal year to report a larger carryforward on account of the expenditures incurred subsequent to December 31, 2013.

However, the income tax return for the first tax year on which the increased carryforward amount is reported would need to explain that the increase resulted from enactment of the 2014 Act, after the original return for that year was filed.

Other practical considerations

Although the 2014 Act reinstates the research credit, expenses paid or incurred on or after January 1, 2015, will not be eligible for a research credit, unless and until a further extension of section 41 occurs. Any potential income tax benefit from a research credit for 2015 expenses would not be recognized, e.g., in estimated tax payments.

However, maintaining contemporaneous recordkeeping for research expenses throughout the next period of a lapsed credit can improve the credibility of any later claims.

Bonus depreciation for fiscal year taxpayers

Because the 2014 Act did not extend bonus depreciation until December 2014, some taxpayers filed tax returns for fiscal years, or short tax years, ending in 2014 without taking into account bonus depreciation on calendar year 2014 qualified property, and are now in the position of having not taken the full amount of depreciation allowable on that property.

Alternatively, fiscal year taxpayers may have elected out of bonus depreciation for all property within a class because the statute did not apply to 2014 qualified property at the time the tax return was filed.

If a taxpayer does not elect out of bonus depreciation and does not deduct the bonus depreciation allowable on the property, the basis of the property is still reduced by that “allowable” depreciation amount, which could affect the amount of gain or loss recognized on a later disposition. A taxpayer may elect out of bonus depreciation on any (or all) classes of property that it places in service in a tax year.

For example, a taxpayer could elect out of the bonus deduction on all of its 5-year MACRS property while taking the bonus on its 7-year property. This election is required to be made with the timely filed tax return (including extensions) for the year the qualified property is placed in service, by attaching a statement to the tax return identifying the classes of property to which the election applies.

The IRS and Treasury have not yet issued guidance that provides relief for fiscal year taxpayers that elected out of bonus depreciation (because the statute had not been extended) or that have filed a tax return for a period that includes bonus depreciation on assets placed in service during 2013, but not assets placed in service in 2014—for example, for taxpayers with a fiscal year ended March 31, 2014, and that claimed bonus depreciation only on assets placed in service during the period from April 1, 2013, through December 31, 2013.

Options provided under Rev. Proc. 2011-26

In Rev. Proc. 2011-26, the IRS addressed a similar dilemma involving bonus depreciation for taxpayers with a fiscal year ending in 2010, or a tax year beginning and ending in 2010. In that revenue procedure, the following options were provided:

1. If bonus depreciation was not claimed on the return for some or all qualified property, and an election out of bonus was not made for that property, the taxpayer can claim the additional bonus deduction either by:

Filing an amended return before filing the return for the next tax year, or

Making an automatic accounting method on a Form 3115 filed with the return for one of the next two tax years, which would claim any under-depreciation as a section 481(a) negative adjustment for that tax year. (To use this procedure, the taxpayer must still own the property at the beginning of the tax year for which the Form 3115 is filed.)

2. If bonus depreciation was not claimed for any qualified property in a class (either for 2009 qualified property or 2010 qualified property), and an election out of bonus depreciation was not made for that property, and the taxpayer did claim some depreciation on such property (other than bonus depreciation), the taxpayer will be deemed to have made an election out of bonus depreciation for that class of property for that tax year if it did not use the procedures described immediately above, in the prescribed time.

3. A taxpayer that made an election out of bonus depreciation for one or more classes of property on its timely filed return could revoke that election. The revocation was accomplished by filing an amended return claiming the correct amount of bonus depreciation for that class of property (on both the 2009 and the 2010 qualified property). The amended return generally needed to be filed before the taxpayer filed its tax return for the following tax year, but provided a later deadline for taxpayers that may have already filed their next year’s return.

Rev. Proc. 2011-26 does not apply to taxpayers with fiscal years, or short years, ended in 2014. However, the alternatives under Option 1, above, are supported by current authorities.

Thus, a taxpayer generally is permitted to either file an automatic accounting method change under section 6.01 of Rev. Proc. 2015-14 to claim additional bonus depreciation on 2014 qualified property, or file an amended return (before the filing of the next year’s return) to claim the additional bonus depreciation.

Option 2 and Option 3, above, are however currently not available unless (and until) additional guidance is issued. The IRS has informally announced that it is working on similar guidance for 2014.

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